There are several options available if you want to withdraw funds from your 401(k). Before age 59½, you can withdraw money from your 401(k) without paying a 10% penalty if you meet certain exceptions. This includes using the funds for qualified first-time homebuyer expenses and paying for certain higher education costs. Once you reach age 59½, you can withdraw funds from your 401(k) without penalty, regardless of the reason. However, you will have to pay income tax on the amount withdrawn. If you withdraw funds from your 401(k) before age 59½ and do not meet an exception, you will have to pay both income tax and a 10% early withdrawal penalty.
Early Withdrawal Penalties
Withdrawing funds from your 401(k) before age 59½ typically incurs a 10% early withdrawal penalty, in addition to any applicable federal and state income taxes. The penalty applies to the amount withdrawn, not just the earnings portion.
However, there are exceptions to the early withdrawal penalty, including:
- Roth 401(k) withdrawals (qualifying distributions are tax- and penalty-free)
- Substantially equal periodic payments (SEPPs) taken for at least five years or until age 59½, whichever is longer
- Withdrawals for certain medical expenses
- Withdrawals for higher education expenses
- Withdrawals for first-time home purchases (up to $10,000)
- Withdrawals for disability or death
If you meet the requirements for one of these exceptions, you can withdraw funds from your 401(k) without incurring the 10% early withdrawal penalty.
| Age | Penalty Rate |
|---|---|
| Under 59½ | 10% |
| 59½ to 59¾ | 10% |
| 60 | 5% |
Required Minimum Distributions
Once you reach a certain age, you are required to start taking money out of your 401(k). This is known as a required minimum distribution, or RMD. For most people, the age to begin taking RMDs is 72. However, there are some exceptions to this rule.
- If you are still working and have not yet reached age 59½, you can delay taking RMDs from your current employer’s 401(k) plan.
- If you were born before July 1, 1949, you must begin taking RMDs at age 70½. You can delay taking RMDs from inherited 401(k)s until you are 59½.
The amount of your RMD is calculated based on your account balance and your life expectancy. The IRS provides a table that you can use to figure out your RMD. [See IRS Publication 590 for details.]
| Age | Life Expectancy | RMD Factor |
|---|---|---|
| 72 | 27.4 | 0.0362 |
| 73 | 26.5 | 0.0377 |
| 74 | 25.6 | 0.0390 |
| 75 | 24.7 | 0.0404 |
| 76 | 23.8 | 0.0419 |
| 77 | 22.9 | 0.0434 |
| 78 | 22.0 | 0.0450 |
| 79 | 21.2 | 0.0466 |
| 80 | 20.3 | 0.0483 |
| 81 | 19.5 | 0.0501 |
| 82 | 18.7 | 0.0520 |
| 83 | 17.9 | 0.0539 |
| 84 | 17.1 | 0.0559 |
| 85 | 16.3 | 0.0579 |
| 86 | 15.5 | 0.0600 |
| 87 | 14.8 | 0.0622 |
| 88 | 14.1 | 0.0644 |
| 89 | 13.4 | 0.0667 |
| 90 | 12.8 | 0.0690 |
| 91 | 12.1 | 0.0714 |
| 92 | 11.5 | 0.0741 |
| 93 | 10.9 | 0.0769 |
| 94 | 10.3 | 0.0798 |
| 95 | 9.8 | 0.0828 |
| 96 | 9.3 | 0.0860 |
| 97 | 8.8 | 0.0893 |
| 98 | 8.3 | 0.0929 |
| 99 | 7.8 | 0.0966 |
| 100 | 7.4 | 0.1005 |
If you do not take your RMDs, you will be subject to a 50% penalty on the amount that you should have withdrawn. For example, if you should have taken a $10,000 RMD but you did not, you would be subject to a $5,000 penalty.
Age 59½ Rule
The Age 59½ Rule is a set of regulations that govern when you can withdraw money from your 401(k) without paying a 10% early withdrawal penalty. The rule states that you can withdraw money from your 401(k) without penalty if you are at least 59½ years old.
However, there are some exceptions to the Age 59½ Rule. You can withdraw money from your 401(k) without penalty if you:
- Are disabled
- Have a terminal illness
- Are taking money out to pay for qualified education expenses
- Are taking money out to buy your first home
- Are taking money out to pay for medical expenses
If you withdraw money from your 401(k) before you are 59½ years old and do not meet one of the exceptions, you will have to pay a 10% early withdrawal penalty. The penalty is calculated on the amount of money you withdraw.
In addition to the 10% penalty, you may also have to pay income taxes on the money you withdraw. The amount of taxes you pay will depend on your tax bracket.
| Age | Penalty | Taxes |
|---|---|---|
| Under 59½ | 10% | Yes |
| 59½ or older | 0% | Yes |
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That’s it for today, folks! Thanks for sticking with me through the intricacies of 401(k) withdrawals. Remember, every situation is different, so be sure to consult with a qualified financial advisor before making any major decisions. In the meantime, keep an eye out for more informative articles on personal finance and retirement planning. See you next time!